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Gold prices holding its ground as Fed shows little concern for rising bond yields, inflation threat

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(Kitco News) - The gold price continues to hold its ground around neutral territory even as the Federal Reserve remains unconcerned about inflation or rising bond yields.

The minutes from the Federal Reserve's March monetary policy meeting showed that the committee discussed the sharp rise in bond yields, which were trading at a one-year high above 1.6% at the time of the meeting.

"Participants commented on the notable rise in longer-term Treasury yields that occurred over the intermeeting period and generally viewed it as reflecting the improved economic outlook, some firming in inflation expectations, and expectations for increased Treasury debt issuance," the minutes said. "Disorderly conditions in Treasury markets or a persistent rise in yields that could jeopardize progress toward the Committee's goals were seen as cause for concern."

When it comes to inflation, the Federal Reserve was also blasé on what some investors see as a growing threat in financial markets.

"Most participants noted that they viewed the risks to the outlook for inflation as broadly balanced. Several remarked that supply disruptions and strong demand could push up price inflation more than anticipated. Several participants commented that the factors that had contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected," the minutes said.

The gold market is seeing little reaction to the latest minutes. June gold futures last traded at $1,741.60 an ounce, roughly unchanged on the day.

Although bond yields have been rising steadily since the start of the year, the minutes show that the U.S. central bank is in no hurry to change its current ultra-accommodative monetary policy. While there was some optimism that the U.S. economy could see a stronger-than-expected recovery, the committee noted that the pandemic has created a lot of uncertainty.

"While generally acknowledging that the medium-term outlook for real GDP growth and employment had improved, participants continued to see the uncertainty surrounding that outlook as elevated. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. Most participants indicated that the pandemic continued to pose considerable risks to the economic outlook," the minutes said.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the minutes were in line with his dovish expectation. He added there is no new information that would indicate the Federal Reserve will adjust its monetary policy anytime soon.

"All things considered, there is little here to change our view that the Fed will wait until late 2023 before beginning to raise interest rates," he said.

Although gold prices have struggled to attract sustainable bullish momentum so far this year, many analysts remain optimistic that the precious metal will remain well supported as interest rates will stay near their historic lows.

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